Modi's New Year speech - Shuddh Yajna or Damp Squib?

Prime Minister Narendra Modi’s New Years Eve address to the nation has been the subject of much debate. Following the demonetisation announcement in November, the government was under a lot of pressure to justify the difficulties that ordinary people went through. In his address, the full text of which can be found here, Modi repeatedly praised sacrifices of common people and called it an unparalleled fight of 125 crore people against the internal evil of corruption. He also said that all government officers have been instructed to take the banking system to normalcy as fast as possible in the new year and prioritise rural and remote areas.

The Economic Times editorial noted - As far as New Year bounties go, this is a bounty. At the same time, the speech did not claim final success for the cleansing ritual launched on November 8, as the prime minister chose to describe demonetisation.

Instead Modi reiterated that the fight against corruption would be a continuing process and went on to announce various sops for farmers, women and small businesses. These include, A 4 per cent reduction in the interest rate on housing loans up to .Rs 9 lakh, a 3 per cent reduction in housing loans up to Rs 12 lakh, 8 per cent assured rate of interest to senior citizens on their deposits, larger volumes of credit to small and medium enterprises, loan writeoffs for farmers, additional paperwork on enhanced credit guarantee for small businesses and an expansive mandate to lend the larger deposits

Shoaib Danyal writes in The Scroll that some of these announcements are banal and only show that Modi has resorted to a welfarist approach to curb anger against demonetisation.
It is also apparent that Narendra Modi has by now completely given up on his minimum government programme. Sops is what the prime minister turns to as a crutch in times of need. The fact that the prime minister had to now pull out a provision of the United Progressive Alliance’s 2013 Food Security Act – which both the UPA and his government had denied to women – is telling.

According to The Wire’s Siddharth Varadarajan, Modi’s speech focused more on the welfare schemes because he realised that demonetisation is not a silver bullet to fight corruption. He also says that the Prime Minister’s understanding of the cash economy was based on faulty economic reasoning. Apart from this claim that only 24 lakh citizens are on record with incomes over Rs.10 lakh per annum, much of the rhetoric was not necessarily backed up with evidence. This includes the assertion that a majority of Rs.500 and Rs.1000 notes were used for illegitimate purposes. Making another case for demonetisation, Modi claimed that excess cash leads to inflation. Varadarajan calls this “poor knowledge of basic economics” and says that in reality, bank deposits are more inflationary. –

When the public deposits cash, either voluntarily or, as is currently the case, under duress, banks keep only a portion of this with the RBI as reserve (depending on the ‘cash reserve ratio’) and lend the rest. If the CRR is, say 10%, and an individual deposits 1 lakh with her bank, this leads to an expansion of bank deposits by a factor of 9. This increased money supply is bound to be more inflationary than if the individual had held on to her cash.

This editorial in the LiveMint also notes that the speech lacked any coherent data based on which the success of the demonetisation move could be assessed. Although Modi said that a large amount of money has been deposited in banks like never before, no official data was been provided.
Neither the government nor the Reserve Bank of India has released updated information about either the quantum of deposits or an estimation of how much of the deposits are black money. It should be noted here that finance minister Arun Jaitley had earlier admitted a lack of certainty about the latter.

It is a major relief to the people. There are benefits of demonetisation to the poor, middle classes and the honest tax-payers. The PM will not rest till the last reform is implemented.

He also justified the sops as a wake-up call to the banks, he said bank credit so far has been extremely concentrated and only 300 companies were getting it. The announcements by the Prime Minister will seek to rebalance this and encourage loans to small businesses.

In his article in The First Post, Seemoy Takuldar also offers a different perspective on the critiques that have emerged. According to him, the demand for specifics is premature.

If that is true — and this assumption has been borne out by economists, various think tanks, research groups and credit rating agencies — then these demands that the PM specify right now how much damage the economy has suffered or how much black money the RBI has mopped up, are premature.

On the welfare measures announced, Takuldar writes –

While some ideas like the interest subvention on loans for home loan borrowers that may facilitate affordable housing and change the game in terms of financial inclusion are original, some ideas such as financial assistance for pregnant women are not, but here too Modi has brought a scheme out of UPA's cold storage (the 2010 Indira Gandhi Matritva Sahyog Yojana was subsumed under the National Food Security Act in 2013) and promised its national rollout across 650 districts.

Towards the end of the speech, Modi also asked political parties to stop their holier-than -thou approach and to work together for the greater good of the country. Making a case for simultaneous elections, he said –

In our country, people ranging from the common man to the President, have at some point or another, advocated simultaneous conduct of state and national elections. This is to break the endless cycle of elections, reduce election expenditure, and minimize pressure on the administrative machinery.

I pity some of our opponents, especially the Congress leadership, for the desperation they have been exhibiting. On the one hand, they say I took this decision for political dividends, and on the other, they say the people have been troubled and are deeply unhappy. How can the two go together?